a) Explain the difference between future and forward contracts.

b) How do swaps work and what are the advantages of entering into a swap?

c) Suppose you observe the following three bonds. Assume that all bonds are denominated at $100 face value per contract and that they pay their coupons annually.

Bond A:

Price - $111.42

Coupon - 15

Maturity - 3 years

Bond B

Price - $108.33

Coupon - 15

Maturity - 2 years

Bond C

Price - $116.61

Coupon - 15

Maturity - 1 year

i) Compute the spot rates r_0,1, r_0,2 and r_0,3.

ii) Compute the forward rates r_1,2 and r_2,3.